Thursday, April 30, 2009

Best Practices for Tough Economic Times

by Mike Henning
Henning Family Business Center
Phone: 217-342-3728
  1. Focus on Cash Flow rather than Paper Profits
    Cash is king in business, and no company can survive for very long without a positive cash flow. Cash flow is defined as a company’s cash inflows minus its cash outflows over a given period of time. If a company cannot cash flow operations, consider alternatives. Yes, a company can stay in business while showing operating losses if they have strong cash flow.
  2. Collect Accounts Receivable
    In order to protect your cash, you company, and your family business’ future, you have to be ruthless and tireless in collecting accounts receivable.
  3. Focus on Lender Relations, and keep them Informed
    Bands do not like surprises. Whether you’re doing okay or whether you’re experiencing some recession difficulties, now is the time to invest a few hours in keeping your banker informed. Adhere to all your loan covenants.
  4. Reduce Tax Payments
    Don’t always focus only on state and federal taxes alone, take a look at real property and personal property valuations to make sure you’re not overpaying.
  5. Know Your Break Even Point
    This is the point at which a product or service stops costing you money to produce and sell and starts to generate a profit for your company.
  6. Know Your Burn Rate
    Burn rate analysis can tell owners whether a company is self-sustaining going forward or if the signals indicate that there is a need for outside financing.
  7. Forecast a rolling 13 week cash flow projection
    Protecting yourself in hard times means you must become intimately familiar with cash flow and must be able to predict it with stunning accuracy. A cash flow statement is a compressed corporate checkbook analysis. It helps avoid liquidity problems.
  8. Invoice your Customers more Frequently
    As a general rule, by invoicing your customers more frequently means you’ll have opportunities to collect their payments sooner.
  9. Drop those Pain-in-the-Neck customers
    In hard times, you need to be focused on core businesses and their highest pay off activities.
  10. Sell underutilized assets and those not producing return on investment
    All too often is to observe vehicles or equipment which is idle.
  11. Borrow money from the corporation’s Cash Value Life Insurance Policies
    Wonder if your cash flow analysis shows you will need cash in four months. Examine company paid insurance policies that have a cash value build-up, and if possible, borrow some of the cash for your business use.
  12. Charge and enforce late fees.
  13. Seek shareholder and family loans where possible.
  14. Negotiate terms with vendors and suppliers.
    Now is the time to make every effort to reduce your overhead while maintaining sound business relationships with suppliers. Negotiating in good faith with vendors could save serious money in hard times.
  15. Be ruthless and dispassionate about cost reduction
    Be diligent, thorough, and dispassionate about seeking belt tightening opportunities.
  16. Utilize zero based budgeting.
    ZBB is a method of budgeting in which all expenses must be justified for each new period. (30 days, quarter, etc.)
  17. Focus on executive duties instead of personal production.
    Experts estimate that most executives spend up to 50% of their time doing things that others could do as well or better and at lower costs. Focus like a laser beam on the highest payoff activities.
  18. Communicate Openly to Your Employees
    Business leaders make sure you are communicating to the rest of the team what the plans for the future are. How will the company weather the current poor economy? What changes need to be made and will be made? Etc.
  19. Communicate openly to Company Stakeholders
    Bankers and other advisors do not like surprises. Being proactive increases your chances for working out a win-win solution.
  20. Careful Not to Lose Focus on Your Core Business
    Define what it is that constitutes your core business and stick to it! Never say never to entrepreneurial opportunities, but make sure the goose that lays golden eggs remains healthy in order to lay golden eggs after the current recession is over.
  21. Developing a Marketing Plan with Accountability
    A good marketing plan is based on formal or informal customer research. Customers, suppliers and advisors my have insightful things to tell you that may surprise you about your business and your core competencies.
  22. Protect Customer Relationships
    Make sure you are devoting sufficient tender loving care to your existing customers.
  23. Establish internal best practices and knowledge sharing
    In slower times we generally speaking have more time to work on internal systems and processes. One of the highest payoff areas is to put your people together so that they can learn from one another and share knowledge.
  24. Don’t try to do too much too fast
    Change is necessary in hard times. However, when making changes, it’s best to make one at a time, digest them a bit, then move on to the next.
  25. Don’t do too little too slowly
    Not having a track record to run on can be an issue, and some companies run the risk of not taking action swiftly enough to stave off disaster. Once the need for change becomes obvious, move decisively.
  26. Focus on product or service margins rather than top line sales
    It’s easy in hard times to take almost any new business that comes in your door. However, taking any business in order to keep your employees busy can be a fateful mistake.
  27. When time is of the essence, develop Decision Making Criteria
    Tough times require that business make swift, sure decisions on strategy and direction. There maybe windows of opportunity which are even now closing, and slow decision-making or making no decision at all, are the worst things you can do in tough times.
  28. Buy distressed assets or competitors
    If there is a fire sale going on that involves equipment, property, HR talent, or even an operating business, there are a lot of people hurting and are willing to give-up.
  29. Join a Peer Review or Performance Roundtable Group
    Yes, it is lonely at the top. Seek out non-competing peers to bring questions and concern to. In some cases it would be prudent to begin an advisory board of risk-taking peers for your own operation. These groups address such topics as financial, investments, direction, top management, etc.
Directions: Upon returning to your business, sit down with your top managers and go over the topics you have marked or highlighted during our presentation. Remember, getting a good idea to help support your company’s success is worth nothing unless you take action.

Suggestions Follow...

  1. You must have an active R&D effort consisting of market study, reading, researching, testing services, products, communications and thoughts of diversification.
  2. You will need a dynamic sales and marketing effort.
  3. Invest in infrastructure every year to remain current in such areas as facilities, computers, building renovations, equipment, etc.
  4. Be willing to engage top talent or outsource for what we lack in expertise.
  5. Our operational piece of the business must include purchasing, inventory control, job flow chart controls, billing guidelines and collection policy.
  6. We must develop a fiscal discipline regarding the big sales/revenue month or quarter that we retain a healthy percentage of this cash to give us the “life blood” of any organization—cash flow.
  7. We must be flexible but not forget our “core” focus or expertise.
  8. We need the best possible support network we can find. For example, our staff of employees, family, friends, National and Regional Associations.
  9. In truly tough business times, we can use a lot of spiritual support.
  10. The ole saying, “take your work seriously but not yourselves.”

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